GARP’s Second Annual Global Survey of Climate Risk Management at Financial Firms
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The Global Risk Institute hosted Jo Paisley, Co-President, and Maxine Nelson, Senior Vice-President from the GARP Risk Institute. The webinar was hosted by Alyson Slater, Senior Director, Sustainable Finance, and moderated by Vanda Vicars, Chief Operating Officer, GRI. Ms. Paisley and Ms. Nelson discussed the findings from GARP’s Second Annual Global Survey of Climate Risk at Financial Institutions.
Seventy-one firms participated in the survey, with the majority of firms completing the survey in relation to their operations in the UK, Europe, and North America. There were key findings presented on how climate risk is integrated into an organization’s governance, strategy, risk management, metrics, targets & limits, scenario analysis, and disclosures.
Ninety percent of responding firms reported that their boards have oversight of climate related risks and opportunities, up from about 80% in last year’s survey.
The majority of firms indicated that they have taken a strategic approach to climate change, or plan to shift away from ‘responsive’ and ‘responsible’ approaches in the near future. A strategic approach was defined as meaning that climate risk are approached with comprehensive long-term processes, with board engagement in place.
Risk management (85% of respondents), strategy (75% of respondents), and operations (56% of respondents) were the top three business activities that have been reviewed for climate risks and opportunities.
Most firms indicated that climate risks are expected to manifest with measurable impacts on business strategy beyond the next 15 years, while climate related opportunities will have more of a significant impact on their strategy within the next five years
Although a lot of work has been done in relation to strategy and business assessments, the majority of firms do not believe their strategies are resilient beyond 5 years. Only 30% of firms believe their strategy is resilient between 5-15 years, and only 10% of firms believe their strategy is resilient beyond 15 years.
Firms are at different stages in the journey to integrate climate risk into enterprise risk management. About 33% of firms introduced climate risk into their business more than five years ago, 22% of firms 2-5 years ago, 23% of firms 1-2 years ago, and 24% just during the last year.
The CRO is the most commonly named senior executive responsible for climate risks, and accordingly, risk teams are the most common function within firms to manage climate risk. Climate risk is most often integrated across existing risk categories such as credit, market, operations, underwriting, etc.
The vast majority of respondents, 95%, claimed that climate risk has not been fully included in market prices.
The majority of firms use metrics (70% of respondents) to assess climate risks, however there is a lower percentage of organizations who use targets (55% of respondents) and limits (31% of respondents) to assess processes and activities related to climate risk. The majority of metrics and limits were shown to be tied to asset risks, while the majority of targets were associated with operations. Participating firms noted that integrating metrics, targets, and limits was one of the more challenging aspects of climate risk management.
About half of the respondents use scenario analysis, mainly on an ad hoc basis, and only 30% reported that they had taken action on scenario results. About half of the firms used a time horizon of under 10 years, and the other half designed scenarios to look out over a decade and in some cases beyond 30 years.
The majority of firms have currently published disclosures in line with the Task Force for Climate Related Financial Disclosure (TCFD) recommendations.
After the results of the survey were presented, there was discussion around the pros and cons of integrating climate across risk categories or rather treating it as a separate risk. Ms. Nelson shared that firms tended to manage climate on a risk by risk basis as it is a forward-looking and not a historic risk. Ms. Paisley went on to share some insights into how climate risk, although in the process of being integrated into enterprise risk management, also needs to be incorporated across the business – such as into sales and procurement – which is challenging as there may not be capability to assess climate risks in these units.
Ms. Slater then started a discussion on the importance of fully engaging boards at the strategy and oversight level, and Ms. Paisley mentioned that the UK regulators have told boards they have to be engaged in climate risks. Although this is a step forward in ensuring board engagement, Paisley pointed to the importance of genuine engagement of boards. Ms. Nelson pointed out that since the financial risk element is becoming better understood climate change is moving out of the realm of corporate social responsibility and into the line of sight for boards.
The webinar concluded with a reflection that climate risk management is fast maturing, and that most responding firms have ambitious plans to develop a strategic approach to the issue, underpinned by improved risk assessment and scenario analysis.
Co-President, GARP Risk Institute
Senior Vice President, GARP Risk Institute